A Railroad Pair Trade: Kansas City Southern Vs. Union Pacific

Citi in a note recommended a pair trade in the railroad sector by designating Kansas City Southern KSU as its top pick, while downgrading Union Pacific Corporation UNP to Neutral.

A pair trade is a trading strategy in which a long position is matched with a short position in a pair of highly correlated instruments.

Analyst Christian Wetherbee noted that "rail fundamentals remain solid, as volume has performed well against firming comps." The analyst is of the view that pricing power could reaccelerate in 2018. However, the analyst noted that the group is up 8 percent over the last two months, pulling forward much of the value they see in 2018.

See Also: Riding The Rails: Canadian Train Stocks Preferred To CSX, Union Pacific

That said, Citi believes the group is unlikely to see material stock price declines, provided volume growth remains modest. However, the firm thinks it's getting more challenging to see enough upside to broadly recommend names.

Citi's favorable disposition toward Kansas City Southern is due to its premium growth and relative value.

In pre-market trading, Union Pacific was slipping less than 1 percent to $114.13.